Money Matters

By Sarah BurtonPhoto by Kris Hanning

Whether thirtysomething or nearing retirement, local expert Thomas Gosnell offers up financial planning advice for all stages of life.

Whether you have all your ducks in a row, or are barely treading water with your personal finances — there’s always something more you can learn, something you can do to further prepare for your financial future. Not everyone in their 30s is just now learning what a 401k is, and not all those approaching retirement are merely coasting. At each level of financial preparedness, the goals and options vary. Tucson Lifestyle asked Thomas Gosnell, Ph.D., CFA, senior lecturer in finance at the University of Arizona’s Eller College of Management, for his help identifying some issues and offering a bit of sage advice for every age group.

Thirtysomething: It Pays to Start Early

Financial planning at this stage of life is crucial. You may already contribute to a 401k, you may have read a bit on planning for the future, but you’ve got plenty of time and it will all work out eventually, right? Wrong.

Actually one of the most common mistakes made at this age is the assumption that getting everything in order is not necessarily top priority. “The biggest financial misconception when it comes to planning at this stage is that somehow things will just work out,” Gosnell explains. “Individuals operating under this philosophy lack a financial plan, and will typically not save nearly enough to meet future needs.” The sooner you start saving, the better.

Gosnell also highly recommends creating a safety net in the event of a job loss by setting aside three to six months living expenses in liquid savings. This way, a short period of unemployment won’t be disastrous or require incurring debt to make ends meet. And not only does he suggest adults in each household have adequate life, disability, liability and health insurance in place, but they should also have wills. “At this age it is difficult to ponder your own mortality, but unexpected things do happen,” Gosnell adds.

The Forties: It’s All About Maintenance

Hopefully by now you’ve created and stuck to a financial plan, but as Gosnell spells out, you should revisit and even change your plan as necessary over the years: “A financial plan is a living document that should be periodically reviewed and revised to ensure you’re on track to meet your goals.”

And if possible, don’t leave all your financial eggs in one basket. Now is the time to diversify your investments — if you haven’t already — by way of a taxable brokerage account or something similar, where there is no penalty for withdrawing your money early, as there is with a 401k or IRA. “A taxable account provides flexibility for spending goals that don’t necessarily fall into retirement or education categories, such as buying a vacation home or an unforeseen future spending need,” Gosnell explains.

Another way he suggests diversifying your savings portfolio is considering an employee stock ownership plan (ESOP), offered by many companies, where employees are compensated with stock. “The goal from the company’s perspective is aligning employee incentives with those of the firm. The employees work hard, the firm does well and the value of the stock goes up.” But Gosnell cautions there is a downside to this type of plan. “Over time the company stock becomes a larger portion of the employee’s savings. If the company were to fail, not only would you be unemployed, but a significant portion of your savings would be wiped out.”

The Fifties: Get Real

This stage, referred to in investment terms as the “consolidation phase,” is the time to take a close look at your plan and seriously examine what your retirement needs will be. As you begin closing the gap and nearing retirement you’ll have an even clearer and more accurate idea of your resources and the lifestyle those resources will support. “Having more than you think you need is better than not having enough,” Gosnell reminds.

“Be generous in your predictions of retirement spending needs and life expectancy. It’s better to have too much savings that you can pass on to your heirs than have too little that may make you a burden on them.” Take a close look and find you’re coming up short? Besides just lowering your spending projections, there are several remedies to consider. First, you can extend your retirement age. “Instead of retiring at 65, work until 70. This increases your savings period by five years and decreases your spending period by five years,” he explains. If that doesn’t work for you, increase your rate of savings. “The IRS limits the amount of income you can set aside in a tax sheltered retirement account. For example, you’re only allowed to contribute up to $16,500 of earned income into a 401k or 403b. But after age 50, you may contribute an additional $5,500 per year under the tax law’s ‘catch-up’ provision.”

Even though investments should be more conservative now, make sure to have an asset mix that will enable your savings portfolio to keep pace with raising price levels. Gosnell also advises looking into long-term care insurance. “The cost of long-term care can rapidly deplete savings. A good policy can help defray much of those expenses.”

Retirement Age: Still Work to be Done

The heavy lifting may be over, but it’s no time for autopilot. “If you’ve reached retirement and have met your savings goal, then congratulations. But planning is not done yet,” Gosnell warns. Be careful with your money — you’ll likely need to spread it out over the next 20-30 years. It’s better for your savings to outlast you than the other way around. “Your retirement savings will need to support you through these years, so although your portfolio’s conservative, it still needs a significant growth component, namely in stocks,” Gosnell advises.

If you’ve entered this age and are still concerned you’ll outlive your savings, you do have options: Consider buying an annuity to provide a guaranteed level of income for the remainder of your life, or if you have significant equity in your home, look into a reverse mortgage to provide regular income. But Gosnell warns, “If you’re in a position to contemplate these options, I strongly recommend the services of a financial planner.”

There’s a reason this stage is often called the spending and gifting phase. “If you’re lucky, at some point you’ll discover you have more savings than you’ll need.” At that time, you can begin making gifts to family and friends. Also consider which organizations you might want to make a difference to, by making a contribution.